Sinotruk’s net profit in 1H20 grew 16% YoY to RMB2.94bn. While the earnings growth looks weaker than expectation, it was due to a RMB1.2bn YoY increase in administrative expense which included a provision for early retirement plan (~RMB800mn) and higher R&D expense (~RMB400mn). We see this a strategic move to further enhance Sinotruk’s competitiveness in future. On the positive side, truck sales volume in 1H20 is better than expectation. Most importantly, operating cash inflow in 1H20 surged 215% YoY to a record of RMB13.5bn, equivalent to 4.3x of the after tax profit, suggesting excellent working capital management. We revised up Sinotruk’s earnings forecast in 2020E-22E by 2-6% (13-20% above consensus), mainly due to higher sales volume assumptions. Our TP is lifted to HK$28.3, based on 6x 2020E EV/EBITDA (multiple unchanged). Maintain BUY.
- Key financials in 1H20. Revenue grew 24% YoY to RMB42.8bn, driven by a 24% increase in truck revenue and a 49% increase in engine revenue. EBIT grew 13% YoY to RMB4bn, mainly dragged by an 81% YoY increase in administrative expense. Operating cash inflow reached 13.5bn. As result, as at end-Jun, financial assets (wealth management products) and net cash reached >RMB30bn, accounting for >50% of Sinotruk’s latest market cap.
- Sales of engine and truck better than expectations. Sales volume of HDT grew 27% YoY to 118k units, mainly driven by 43% YoY increase in China sales. In particular, gas-fueled HDT sales grew 54% YoY to 22k units. LDT sales volume grew 24% YoY to ~82k unit. Sales of engine grew 32% YoY to ~129k units, with in-house consumption ratio rising to 95% in 1H20 from 93% in 1H19. Segment margin of LDT in 1H20 sharply recovered to 5.1% from -1.9% in 1H19, thanks to a sharp reduction on the impairment loss.
- Streamlining the labour force implies further cost reduction in future. Sinotruk has been streamlining the labour force since 2018. Over the past two years, the number of staff engaging in R&D, sales & marketing were on the rise while production & administrative staff reduced (figure 2). In 1H20, total labour force reduced by 9% versus that in 2019, a key reason that Sinotruk recognized ~RMB800mn expense on termination and retirement benefits in 1H20 (based on our calculation). We believe this is one-off in nature and such move will reduce the staff cost over the coming years.
